- September 9, 2022
- Posted by: Charles Yeboah Nixon
- Categories: Banking and Finance, Economics, Finance, Forex
Kenya’s major banks face rising asset-quality risks from weaker global and domestic conditions, but should continue to deliver strong returns in 2022, Fitch Ratings has said in a new report.
Kenyan banks’ sector outlook is negative, mirroring the negative outlook on Kenya’s sovereign rating. Operating conditions have worsened due to high inflation, risks to growth from global shocks and the harsh domestic drought.
This has caused asset-quality deterioration with the sector’s non-performing loans ratio increasing to 14.7% at end-second quarter 2022 (end-2021: 14.1%), much weaker than the regional average.
“We anticipate continued asset-quality pressures, mainly from SME and retail loan books, which is likely to push up credit costs and increase risks to the banks’ performance. Kenyan exporters are also affected, particularly from the slowdown in the Eurozone”, it said.
These asset-quality risks are counterbalanced by a post-pandemic profitability rebound. Net interest margins will be supported by the approval of risk-based pricing models in 2022 and the conclusion of a largely peaceful general election, which will spur credit growth. Rising rates and yields on government securities will also be positive for pre-impairment operating profit, which will provide a large buffer for likely higher credit costs.
The sector’s total capital adequacy ratio improved to 19.5% at end-2021 (end-2020: 19.0%). However, a number of smaller banks have clear capital deficiencies, which will encourage further sector consolidation.
“We expect the large banks to maintain prudent capital buffers in light of operating environment uncertainty and their ambitious growth prospects”, the report explained.
Funding and liquidity remain a strength with larger banks mainly funded by stable, low-cost customer deposits gathered within Kenya through wide distribution channels.
Fitch-rated Kenyan banks remain constrained by Kenya’s sovereign rating (B+/Negative), reflecting the concentration of their activities in the country and high sovereign-related exposure.
The large banks continue to build on their domestic franchise strengths through regional expansion in pursuit of diversification.